Abstract
Option-based measures can predict underlying stock returns, due to differences in price discovery and price pressure effects between options and underlying stocks. We investigate stock return predictability by various option price-based measures using REITs. REITs are more transparent and efficiently priced than general stocks, but REIT options are less liquid. Consistent with the model of Easley, O’Hara, and Srinivas (1998), most of the option price-based measures do not significantly forecast REIT stock returns, but changes in option implied volatilities are robust and significant return predictors. We provide further evidence supporting the informed trading channel instead of the price pressure effects.
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